Dollar Falls Most Since May as Borrowing Costs Become Cheapest

By Matt Townsend and Oliver Biggadike

Sept. 12 (Bloomberg) -- The dollar declined the most since May versus six major counterparts as the greenback became the cheapest funding currency, prompting investors to sell the dollar and buy riskier assets.

Sterling rose this week to a one-month high versus the dollar as the central bank refrained from expanding its asset- purchase program. The yen appreciated to near 90 versus the dollar before next week’s Bank of Japan meeting on speculation China’s recovery will boost the growth of its Asian neighbors and Japan’s exporters will repatriate earnings.

“The use of the dollar as a funding currency is understandable given how liquid the dollar is in terms of its ability to trade across foreign-exchange markets,” said Nick Bennenbroek, head of foreign-exchange strategy at Wells Fargo & Co. in New York. “That’s probably why it’s being taken advantage of right now.”

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of U.S. trading partners including the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, dropped 2 percent to 76.608 yesterday, from 78.136 on Sept. 4. The decline was the biggest since a 3.7 percent reduction in the five days ended May 22. The gauge touched 76.457, the lowest since Sept. 25, 2008.

The U.S. currency’s decline didn’t discourage investors from buying Treasuries this week. Thirty-year U.S. bonds advanced, pushing the yield down 0.1 percentage point to 4.17 percent, after the $12 billion of the securities offered Sept. 10 drew the strongest demand in almost two years.

Stronger Yen

The yen advanced to a seven-month high versus the dollar as China’s output increased 12.3 percent in August from a year earlier and on speculation Japanese companies are bringing back money earned abroad to take advantage of a tax break that went into effect this fiscal year.

The Japanese currency gained against most of its major counterparts as it surpassed a support level at 92 yen per dollar, said Boris Schlossberg, director of currency research at online currency trader GFT Forex, in New York. Support is a technical-chart area where orders may be clustered.

“It’s a momentum move,” Schlossberg said. “We broke the 92 handle, which was a pretty critical support area. There was a tremendous amount of stops below there, and once that gave way it was like a waterfall cascade and pushed everything lower.”

The Bank of Japan is forecast by all of the eight economists surveyed by Bloomberg News to hold the target lending rate next week at 0.1 percent.

Weaker Dollar

The yen advanced 2.5 percent to 90.71 versus the dollar and reached 90.21, the strongest level since Feb. 12. Japan’s currency gained 0.6 percent to 132.17 yen per euro. The euro increased 1.9 percent to $1.4571 after reaching $1.4634, the strongest level since Dec. 18.

The three-month London interbank offered rate, or Libor, for dollars dropped below that of the Swiss franc on Sept. 8 for the first time since November, making the greenback the cheapest currency to fund purchases of higher-yielding assets. The dollar rate ended the week at a record low of 0.299 percent, compared with 0.359 for the yen and 0.307 for the franc.

The franc gained 2.3 percent to 1.0373 versus the dollar and touched 1.0340, the strongest level since July 29, 2008.

The pound advanced to $1.6742, the highest since Aug. 7, as the Bank of England left unchanged its asset-purchase program of buying up to 175 billion pounds ($290 billion) in bonds in a sign policy makers believe the economy is recovering. The BOE kept the main rate at a record low of 0.5 percent.

Bollard on Currency

New Zealand’s dollar rose for a ninth week in the longest stretch of gains in a decade even as Reserve Bank Governor Alan Bollard said in a Radio New Zealand interview yesterday that its “undesirable” gains won’t encourage exports.

Bollard left New Zealand’s benchmark interest rate unchanged at a record low of 2.5 percent this week and said cutting borrowing costs was unlikely to curb demand for the currency. The kiwi, as the currency is known, reached 70.88 cents, the highest level since August 2008.

The New Zealand dollar surged 38 percent against the U.S. currency in the past six months in the best performance among the 16 most-traded currencies tracked by Bloomberg as optimism the global economy will recover encouraged traders to bet Bollard won’t be able to hold down interest rates.

The U.S. currency may pare its decline next week on speculation its drop is too big to sustain, according to some strategists.

Relative Strength

The 14-day relative strength index on the euro-dollar exchange rate rose to 67.8 on Sept. 10, the highest since June 2. A reading of 70 tends to indicate the rise approaches the extreme and a reversal may be imminent. When the RSI reached 69.6 on June 1, the euro dropped 1.3 percent in a week.

“The thing about the currency market is it tends to go farther and longer than any point of rationality that makes sense,” GFT’s Schlossberg said. “It’s very possible that the turn in the dollar won’t happen until we break 90 in the yen, $1.47 in the euro and $1.70 in the pound. Once you hear people talking about $2 a pound and $1.50 in the euro, you are going to see a correction in the dollar.”

The U.S. will report inflation data and advanced retail sales on Sept. 15, giving investors more insight into a recovery from the worst recession since the Great Depression. The producer price index in August rose 0.8 percent after a 0.9 decline in the previous month, according to the median forecast of 61 economists surveyed by Bloomberg News. Advance retail sales climbed 1.9 percent in August after a 0.1 percent drop in July, 60 economists said in a separate survey.

To contact the reporters on this story: Matt Townsend in New York at mtownsend9@bloomberg.net; Oliver Biggadike in New York at obiggadike@bloomberg.net

Last Updated: September 12, 2009 00:00 EDT